Take home pay – Achieving tax efficiency in light of upcoming changes

Recent tax changes signal a clear shift in how business owners, directors and higher earners are taxed.

For a long time, remuneration planning has centred on a familiar mix of salary, dividends and pension contributions to protect take-home pay.

That landscape is now tightening. Several well-established planning routes are being restricted, reflecting a deliberate move by the Government towards what it frames as greater fairness across the tax system.

Fiscal drag continues to do the heavy lifting

Income Tax and National Insurance thresholds remain frozen until 2031. As wages rise, more people are pulled into higher tax bands without any real increase in spending power.

For directors already close to higher or additional rate thresholds, even small pay increases can have a disproportionate impact. Those in the additional rate band may also see further erosion of the personal allowance. The overall effect is a higher effective tax burden and fewer ways to mitigate it.

Dividend tax changes reduce flexibility

Dividends have traditionally offered a tax-efficient way to extract profits. From April 2026, the main dividend rates increase by two per cent:

• The ordinary rate rises from 8.75 per cent to 10.75 per cent
• The upper rate increases from 33.75 per cent to 35.75 per cent
• The additional dividend rate remains at 39.35 per cent.

Dividends still retain an advantage over salary, but the gap is narrowing. This makes it increasingly important for directors to review how profits are drawn and whether the existing balance between salary and dividends still makes sense.

Pension planning and the narrowing window

Pensions continue to play a central role in tax-efficient remuneration. However, from April 2029, tax and National Insurance relief on salary sacrifice pension contributions will be limited to the first £2,000 each year.

While this reduces long-term flexibility for higher earners, it also creates a planning opportunity in the years ahead.

Reviewing contribution levels now, while current rules remain in place, may help soften the impact of wider tax changes, provided this aligns with cashflow and business priorities.

What this means for business owners and directors

The direction of travel is clear. The tax environment is becoming more restrictive and many familiar planning tools are being scaled back.

That does not mean opportunities have disappeared, but it does mean that forward planning is more important than ever.

Understanding how these changes interact, rather than viewing them in isolation, will be key to maintaining resilience and control.

We continue to support clients in reviewing remuneration structures, long-term planning and overall financial strategy in light of the evolving rules.

If you would like to explore how these changes affect your own position, please get in touch.